South African motorists feeling the pain

South African motorists face a near-perfect storm of high interest rates, increased costs to purchase and maintain a vehicle, and high petrol prices. 

This has resulted in weak passenger vehicle sales, with car sales down 7.4% to 246,052 units. The market may fail to reach 500,000 units this year.

Many have pointed to the increased cost of cars as the main reason sales have declined, with vehicle financier Wesbank saying this is the biggest factor limiting growth. 

TransUnion SA Vehicle Pricing Index showed that new vehicle prices rose 4.7% for the first quarter of 2024 compared to last year. Of the 1,481 car models in South Africa, only a quarter are priced below R500,000.

WesBank’s data shows that the average loan amount on a new vehicle increased by 3.5% during June, the average deal duration increased by 3.8%, and the average contract period is over 73 months.

The marginal increase in the average loan amount is evidence that many households are opting for one multi-purpose vehicle rather than maintaining multiple vehicles. 

It also reflects the difficult economic environment in which South African consumers find themselves, with inflation and interest rates set to remain high for a longer time. 

“These are all signs of affordability challenges that either indicate that consumers are holding onto their existing vehicles for longer or that they are forced to lower instalments by extending the loan period,” said the head of marketing at WesBank, Lebo Gaoaketse. 

One of the primary factors impacting debt remains high interest rates, with relief only expected during the second half of the year.

For example, the average loan value at WesBank is R410,000. At the prime lending rate of 11.75%, the instalment is an estimated R8,054.83 over 72 months. 

A customer who had financed the same value vehicle in 2020, which was linked to a prime rate of 7%, would be paying R1,015.81 more per month today. At current interest rates, this equates to about R75,730.32 more for the same car over the same contract period.  

“Those with an option to delay a purchase decision or opt for alternative mobility solutions, including e-haling, sharing, or the pre-owned market, are voting with their feet and exiting the new vehicle market,” Gaoaketse said. 

“Until we see some relief in interest rates to start combatting affordability, new vehicle sales will continue to remain under pressure.”

Head of marketing at Wesbank, Lebo Goaketse

South Africans turn to debt

In response to this financial pressure, many South Africans are turning to debt to purchase new vehicles and maintain their lifestyles. 

Data from Standard Bank shows that a third of its customers looking to purchase a new vehicle have chosen to include the maximum possible balloon payment. 

“Given the current cost of living crisis and the 15-year high interest rates in South Africa, consumers are looking for more ways to stretch their budgets,” the head of vehicle and asset finance at Standard Bank, Glenn Stead, said. 

The bank’s data shows that new vehicle purchases, including balloon payments, have increased by 41% in the past five years.

Balloon payments can make monthly repayment more affordable, which appeals to people who rely on private transport to get to work or school.

A balloon payment is effectively a deferred debt that consumers can opt to move to the end of their contract. Monthly instalments are then calculated based on the principal debt minus the deferred debt portion.

However, Stead said some consumers don’t fully understand how this type of deal will affect them down the line.

The total amount the consumer will pay at the end of their financing term will be higher with a balloon payment. 

For instance, when a consumer buys a R200,000 vehicle at a 10% interest rate and opts for a 20% balloon will pay R10,000 more after six years.

This is because while the consumer pays interest on the principal debt, no payments are made towards the balloon amount. Interest is charged on the balloon amount from day one, too.

Typically, a balloon payment is paid off by trading in the vehicle or initiating a separate loan agreement to pay it off over 12, 24, or 36 months. A consumer can only take ownership of a vehicle once this full amount is settled. 

The increased cost of taking out a balloon payment on a vehicle is shown in the table below, courtesy of Standard Bank.


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